(Bloomberg) -- If you buy an apartment in England, the chances are you aren’t actually “buying” it at all. In most cases, you’re paying the real owner for the right to live there for a set period. “Leaseholds” are one of the oddest, and most contested, quirks of Britain’s ancient property laws. Critics who see them as a license for landlords to rip off their tenants have convinced a new Labour government to overhaul the system. Here’s why campaign groups are calling it an “end of history moment.”
1. What’s a leasehold?
Purchasing a lease confers the right to live in a property for a set number of years. The arrangement is different to a regular rental, known as an assured shorthold tenancy, as the term is generally far longer (between 21 and 999 years) and the tenant cannot be evicted unless they’ve breached the terms of the lease. They effectively “own” the property for that term, but not the land on which it’s built. The arrangement dates back to the period following the Norman invasion when the country’s new aristocracy began renting land for fixed periods to agricultural laborers, who would provide food and services to those higher up the social order in return. Leasehold ownership has grown since the 1950s as the number of new apartment buildings grew. Outright ownership wasn’t possible in the case of apartments as full “freehold” ownership requires a land boundary that’s visible on a map.
2. What’s the problem with leasehold ownership?
The freeholder can block significant alterations to the building. If you bought your leasehold property with borrowed money, its value for mortgage purposes begins to fall dramatically as the lease approaches expiry. While freehold owners are often responsible for maintaining the fabric of a building, the final cost often sits with the leaseholder, and there are no rules on how much the freeholder can charge for repairs and upgrades. With apartment blocks, especially newer ones, the result can be extortionate maintenance fees that only grow as each year passes. Property developers have even begun to charge significant “ground rents” to leaseholders as a way of extracting more revenue from projects. Ground rent was traditionally so low that it was often referred to as a “peppercorn rent.”
3. What is the new government doing about it?
The Leasehold and Commonhold Reform Bill announced in the King’s Speech on July 17 would take steps to bring this ancient system to an end, making it easier for leaseholders to buy the freehold on their home. Plans by the new Labour government to restrict the sale of new leasehold flats go a step further than the previous Conservative administration’s now-redundant Leasehold and Freehold Reform Bill, which only pledged to forbid the sale of leasehold houses. The legislation will aim to protect leaseholders against losing their homes to freeholders if they breach their lease agreements. It will increase regulation of ground rents for existing leaseholders to protect them from unaffordable costs. The new government has also promised to modernize the legal framework to encourage commonhold agreements. These allow residents to jointly own and control the communal areas of a property and make decisions by democratic vote, an arrangement similar to the US condominium system.
4. Why is the government changing the system now?
Since a London apartment block fire blamed on substandard exterior cladding killed 72 residents in 2017, leaseholders have been on the hook for expensive upgrades to their properties and in many cases have been unable to sell their homes. The new government is under pressure to improve conditions for homeowners and would-be buyers who have been squeezed by the highest interest rates in 15 years.
5. Are campaigners satisfied with the proposals?
The reaction from campaigners was far more positive than when the Conservatives announced its plan last year to ban the creation of new leasehold houses, but not flats. Some had warned the Tory measures wouldn’t go far enough as apartments make up 70% of all leasehold homes. Campaigners took to social media after the King’s Speech on July 17, calling it a “seismic day for the leaseholder liberation movement”. Still, some experts question the feasibility of converting large blocks of flats to commonhold because it relies on all the new freeholders approving expenditure to maintain or improve the buildings, which can lead to delays and disputes.
6. Will the reforms impact the housing market?
Nearly 80% of real estate agents say leasehold properties with a ground rent that increases over time are hard to sell, according to a survey published last year by Propertymark. It also noted that an increased awareness of issues related to leaseholds has encouraged some buyers to negotiate harder on pricing. Propertymark said any future change in legislation — such as capping ground rent — would ease buyers’ concerns and potentially lead to a rise in leasehold prices.
©2024 Bloomberg L.P.
